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HMRC internal manual

VAT Refunds

Unjust enrichment: Economic loss or damage: General

If VAT is imposed on a supply with a consideration of £100, the cost to the customer (consumer) will be £117.50. However the true economic position as far as the supplier is concerned may well depend upon the principles of supply and demand.

If VAT has been wrongly imposed, the consequential increase in price may have an effect upon the supply and demand for those goods or services. It is a general assumption in business and economics that an increase in price will affect the number of sales. Simply put, as price increases, demand falls.

It is this fall in demand and consequential loss of sales (and loss of profits) that will often be said to give rise to any economic loss or damage. However the relationship between a price increase and supply and demand is not necessarily linear or straightforward. Thus, the extent to which a business may suffer economic loss or damage, if at all, will depend very much upon the particular economic market in which those supplies are made.

Generally, in an economic market where there is a very high demand from customers (consumers), a business making supplies in that market will be able to pass on any additional costs. On the other hand, where demand is lower, additional costs are less easily passed on.

Unforeseen or unplanned costs arising as a consequence of a mistaken assumption about VAT, such as previously recoverable input tax becoming irrecoverable, might also give rise to an argument for economic loss or damage.

This basic analysis illustrates that errors in the imposition of VAT will have different effects in different business sectors and their associated economic market. At the two ends of the scale you may find that in one market sector it is possible to pass on the burden of the VAT in full while in another the trader is forced to absorb the entire burden himself. To establish the precise effects in any particular case will require some economic analysis.